Halliburton: Buy the Drop for Big Gains

Shares of Halliburton (HAL) picked up nearly 4% after attaining a 52 weeks low of $28.48 a share on January 20, to the current level of $29.28 a share. This rise in its share price was despite the fact that the company had reported disappointing numbers for its fourth-quarter as well as for the full year.

Weakness in the business

The oilfield service company for the quarter reported earnings of $0.31 per share, a 74% lower than its earnings of $1.19 per share in the fourth-quarter of 2014.

Its revenue came in at $5.1 billion, a slump of 42% as compared to the same quarter a year earlier. For the full year, the company generated earnings of $0.78 per share on the revenue of $23.6 billion. This represents a drop of 28% and 81% respectively as compared to 2014 levels.

Then what drove its share price performance? Certainly not the oil price, but the kind of progress it is making on the operational side through various initiatives. These initiatives helped the company to protect its margin during this so called dead oil price milieu. Let us have a glance on those initiatives.

Relentless focus on cost management

Halliburton has adjusted its costs structure to the demanding market conditions. For instance, the company reduced its operating costs and expenses by more than 14% in 2015 from 2014 levels. The company was able to realize this benefit in its costs structure partially through a 25% reduction in the global headcounts in 2015.

This cost reduction is a result of its efforts of revisiting its cost profile throughout 2015. These efforts allowed HAL to mitigate the impact of lower commodity price environment on its operating margins, despite significant drop in the activity and rig counts.

Looking ahead, the company sees considerable reduction in the costs structure in 2016. It is particularly targeting to reduce both the variable costs and sustainable fixed cost items like refining by way of its maintenance process and through value engineering exercises. These processes helped the company to remove approximately 20% of costs from couple of its products out of 20 products in 2015.

In addition, Halliburton expects significant synergy in costs reduction from the Baker Hughes acquisition in future. As per the management, “the proposed merger is good for the industry and for our customers. The combination is expected to create an even stronger company and achieve substantial efficiencies, enabling us to compete aggressively to provide efficient, innovative and low-cost services.”

Improving North American business is a tailwind for Halliburton

Halliburton is strategically improving its North American conditions. Its completion related activity declined at a lesser clip as compared to the large decline in the U.S land rig counts. For instance, the company saw a 33% decline in its completion related activity relative to a 64% drop in the US land rig count.

This is because the company did manage to provide its customer what they wanted. Its consistent focus on providing solutions such as DecisionSpace and RockPerm facilitated the customers to maximize production and lower their cost per barrel of oil. These solutions notably increased the level of efficiency for its customers across North America.

As a result, Halliburton managed to improve its operating margin by 160 basis points despite its revenue getting declined approximately 13% for its North American segment in the last reported quarter. This sort of progress will position its North American land business for future success and create value for its shareholders when the upturn in the commodity market takes place.

Looking ahead, the company during the last reported quarter added a new technology namely MicroScout. This technology is a hydraulic fracturing treatment designed to deliver proppant into far field micro fractures enhancing the productive life of new wells. The company expects this technology will help its customers increasing their production by 20% compared to offset wells.

Other positives to consider

Meanwhile, Halliburton experienced improvement in its international business, despite pricing concessions and activity reduction throughout 2015. For example, the company managed to keep its operating margin relatively stable in 2015 as compared to 2014, despite a 16% drop in its revenue for International segment. In fact, this drop in its international revenue was smaller than the drop in its North American business. This is because its Middle East division continues to perform well. Middle East witnesses a margin improvement of 130 basis points, despite its operating income getting declined by 16.6% for the year. This strong performance in its operating margin can be attributed to its relentless focus on cost management.

Looking ahead, the company expects its Middle East and Asia to remain most resilient due to a recent mature field project, which is forecasted to move forward. However, the other regions are expected to experience softness due to activity declines and price reductions in 2016.

Conclusion

Halliburton looks pretty good in the long-run. Although, the current downturn in the oil market has impacted its financial negatively, but its significant evolution on the operational side as well as investment in the new technology have protected its margins. The company should benefit from these efforts once the recovery in the commodity market takes place. The company has strong balance sheet that includes total cash of $10.14 billion and total debt of $15.35 billion. It has operating cash flow of $2.91 billion and free cash flow of $729.62 million for the trailing twelve months.